Back in the days before the consolidation of the Makati Stock Exchange and the Manila Stock Exchange, traders were transacting profitable trades by using price arbitrage between the two exchanges. As issues were traded on both markets, often there were times that the price for the same stock was different on both exchanges.
Most of the time, the price differential was minimal. However, there were times that a person could buy on one market and simultaneously sell on the other for a profit. That is a form of arbitrage trading.
The Philippine Stock Exchange (PSE) has announced that it has finalized the rules to allow listing and trading of issues in both Philippine peso and the US dollar.
This is not a new idea. In 2002 the idea was finalized and apparently started trading in 2003. The trading and settlement with dollar denominations was intended to be strictly for offshore issues listed on foreign exchanges, such as in the US, Canada, Hong Kong and the UK. The volume and results of that program are unknown, as all information on the success or failure has disappeared or was never widely available.
Having stock-market issues trade in two different currencies is fairly widespread, particularly in Asia including the Toronto Stock Exchange. In its appraisal of dual-currency trading, the Toronto exchange acknowledged and, to a certain extent, encouraged investors to arbitrage dual listed, as this would bring trading transactions to the Canadian exchange.
The purpose is threefold; to make it easier—and cheaper—for foreigners to invest in the Philippine market; to virtually eliminate foreign-currency risk for foreign investors; and to allow locally listed companies easier access to foreign investors.
But before you get too excited, understand that DDS will only apply to local companies when they issue a new set of securities either common or preferred shares. For example, food conglomerate Del Monte Pacific Ltd. intends to issue up to $360 million in US-dollar denominated preferred shares early next year.
The trading, pricing and settlement details of the DDS are that the dollar price will be determined by the previous day’s closing price on the Philippine Dealing System. Any currency rate changes today will not take effect until tomorrow.
There is nothing inherently flawed with dual-currency trading. However, as the Del Monte Pacific proposed offering shows, the beneficiaries will be local companies, foreign investors and the stock exchange in that order. Local retail investors will not necessarily benefit.
Investors buy preferred shares for the longer term and foreigners want a higher dividend rate to make up for currency exchange rate for five yeas of holding, for example. Companies will benefit from being able to pay a lower rate. Foreign investors will benefit from evading the exchange-rate risk and the stock exchange will benefit for a potentially greater amount of trading transaction fees.
Maybe some time in the future, the PSE will study and implement changes that will directly add to the profitability of the stock market for local retail investors—you know who those are; the little guys not part of the “Old Boy’s Club”. “Short Selling”, a structural trading system to provide “Stop Orders” and “Limit Orders”, as well as an options market to hedge positions are all what is really needed.